How Do Social Media Sites Make Money?

July 6, 2010 · Written by James Gelfer

From small businesses to international corporations, everyone is looking to capitalize on social media to expand their clientele and promote their business. One of the main draws of various social media sites is the fact that they are free, which is pretty amazing considering Facebook alone has over 500 million users. As you can imagine, creating efficient software that performs flawlessly on this scale is a labor-intensive task requiring a full team of individuals. And since these social media sites are free, the obvious question then becomes how do these companies stay afloat, let alone turn a profit?

Venture Capitalism

Like many startups, social media sites are often backed by a set of venture capitalists that put down a sizable initial investment with the belief that the company will yield large dividends in the future. For social media sites, this investment often comes from other well-established internet sites, such as Google’s multi-million dollar investment in Facebook a few years ago. This trend still doesn’t answer the question as to where the sites’ actual revenue comes from; that all boils down to advertising.

Advertising

Newspapers survived for generations on advertising, but it’s no secret that the demand for print ads is dwindling. And it’s not that the need for advertising is subsiding altogether; companies simply want to go where the people are, and currently, that’s social media sites. With their constant stream of visitors—most of whom divulge a wealth of personal information—social media sites offer companies an unprecedented means for target marketing. For example, when I login to my accounts, I’m immediately notified of new CDs, movies and products that I am likely to buy—and this is no coincidence. As you can imagine, this type of targeted advertising is more efficient and cost-effective than other, more traditional, methods. And not only do these sites offer finely-tuned marketing campaigns, each page features a glut of generic advertisements on the sides as well.

You’ll notice that most of the examples above come from Facebook, and that’s because they’ve been the most successful in turning their online forum into a moneymaking enterprise. One of the ongoing inside jokes in the social media world revolves around that fact that Twitter has yet to find an effective way to incorporate ads to their site and produce consistent revenue. But it looks as if that may be about to change. Tweetup, an ad platform and search engine tool from Twitter, is looking to finally turn a profit for the site by offering people options to make their Tweets more relevant in searches. Earlier today, the company announced that they were acquiring Twidroid and Popurls, two popular services which can be used in conjunction with the Tweetup feature.

In just a few years, social media sites have become staunchly ingrained in American culture, and it doesn’t appear that they will be going anywhere soon. The challenge in the future will be for the sites to find a balance between providing an easy-to-use, valuable networking and the need for advertisements to produce a consistent stream of revenue. One thing is for certain however: all of these companies are continually at work to refine and perfect their advertising campaigns.